Moody’s Dims Outlook on Germany

The ratings firm Moody’s Investors Service late Monday dimmed its outlook on Germany, the euro zone’s dominant economic power and political force, further exposing the currency bloc’s fragility on a day that also saw markets drop around the world on fears about Europe.

Moody’s cited the huge potential cost of a euro breakup and, alternatively, the steep bill that would be paid to hold it together.

The warning to Germany followed a dramatic flight by investors from Spanish bonds Monday, leaving the euro zone’s fourth-largest economy at grave risk of needing a bailout and sparking a selloff on global markets.

Stock markets across Europe slumped sharply, with Greece down 7.1%, Germany off 3.2% and Portugal 3.4% lower. In Spain, the benchmark index was off more than 5% before the country’s market regulator moved to ban short-selling of all stocks for three months. The index ended the day down 1.1%. Italy banned short-selling of financial stocks for a week.

In the U.S., the Dow Jones Industrial Average plunged early, declining almost 240 points before clawing back to finish 101.11 points lower at 12721.46.

Asian markets fell in early trading Tuesday, with Japan down 0.3%, Australia slipping 0.1% and South Korea steady. The Shanghai Composite lost 0.4% to reach an intraday low for the year.

In downgrading to negative its outlook on Germany’s triple-A rating, Moody’s pointed to the vast liabilities Germany would incur in a bailout of Spain and Italy, as well as its banking system’s “sizable exposures” to them. Moody’s also shifted to negative its outlooks on triple-A Netherlands and Luxembourg. Only Finland, more economically isolated than the other triple-A countries, now has a stable rating from Moody’s.

The negative outlooks don’t necessarily mean a downgrade is imminent, but they make clear how devastating a collapse of Spain and Italy would be. Spain is the euro zone’s most acute challenge since the 17-nation currency bloc faced a near-catastrophic run on Italian and Spanish bonds last summer. The seminal issue now: how to keep Spain’s deficit-running government financed. If private investors can’t be lured back, Europe will need a fresh public stopgap.

“They have to stop this spreading to Italy,” said Helen Haworth, head of European interest-rate strategy for Credit Suisse in London.